Price Discrimination in E-market

1. Emese Habodász Július Pál Price Discrimination in E-market

2. Price Discrimination • Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. • the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount • Example airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers.

3. Price Discrimination • Types of price discrimination • First degree • Seller extracts full surplus,this involves charging consumers the maximum price that they are willing to pay • Second degree • Partial discrimination based on buyer self-selection into pricing category. Customers willingly choose to pay differential prices for different versions or quantities of a good or service. E.g. after 10 minutes phone calls become cheaper. • Third degree • Discrimination based on signal correlated with preference. This involves charging different prices to different groups of people. E.g. students, OAPs and peak travellers etc.

4. Some instances of price discrimination are not visible to the public, except through indirect effects. Third degree price discrimination, changing gas stations prices that depend on the “zones” where the stations are located, towns located in different part of a state. Look at the prices at gas stations in Bratislava the gas costs 39.20 SKK, at same time in Kosice gas costs 37.50 SKK, tank full (50 liters) in Bratislava is 1960 SKK, in Kosice is 1875 SKK, difference is 85 SKK, you will pay 4.5% more in Bratislava. While it is not known publicly how prices for different zones are derived, one can expect that they are based on prior experience, presence of competition, and demographics of a zone.

5. To illustrate the benefits of first degree price discrimination , • the seller wishes to sell advertised good expecting total revenue of ρ = 1200 SKK. Three buyers express interest for the product with respective prices v1 = 300 SKK, v2 = 500 SKK and v3 = 700 SKK. Without price discrimination the seller can set an average price of 1200/ 3 = 400. This will result in a revenue of 800 SKK that is below the expectations of the seller (this is because the product would be too expensive for the first buyer). In the perfect price discrimination setting the total revenue is 1800 SKK but it is quite likely that the third buyer will not be willing to pay 400 SKK more than the first buyer for the same product (and similarly for the second). avg price of 1200/ 3 = 400 Seller total revenue 300+500+700=1800 300 700 500 Buyer1 Buyer2 Buyer3

6. First Degree Price Discrimination in E-markets • Electronic commerce, commonly known as e-commerce or eCommerce, consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks. • Computer science and cryptography study manipulation and exchanges of information in the electronic world, based on the computational model and computational environment constraints.

7. eBay • EBay is the shopping website with online auction business model which participants bid for products and services over the Internet. Like most auction companies, eBay does not actually sell goods that it owns itself. It merely facilitates the process of listing and displaying goods, bidding on items, and paying for them. It acts as a marketplace for individuals and businesses who use the site to auction off goods and services.

8. Auction formats at eBay If you enjoy the interaction of bidding and the fun of winning a treasure or a great bargain, investigate the following ways of buying. • Auction-like Listings – These include Reserve Price Auctions and Private Auctions. • Second Chance Offer – Under certain circumstances, the seller can offer the item to a bidder other than the auction's winner. • Multiple Item Auction – Listing that offers two or more identical items. • Specialty Sites – eBay Live Auction and eBay Motors.

9. About price discrimination protocol • Active Participants: The Seller (S), the prospective buyers (B1 ,…, Bn).All communication takes place through a “bulletin board,” a model that abstracts away all lower level communication details. • Inputs: the expected revenue of the Seller. The maximum amount that player Bi is willing to spend vi < B. • Output: The seller computes the total contribution. Each buyer either.

10. – Security Specifications. – Correctness. Each active participant computes the outputs as specified above. • Privacy. The initial amount that each Buyer is willing to spend is kept secret (modulo the information that is leaked by the results of the procedure). Formally, privacy is intended to be shown by comparison to the ideal implementation of the scheme using a trusted third party: All buyers and sellers transmit privately their values to the trusted third party who announces the output as defined above. • Robustness. No participant can prevent the procedure from terminating. • Verifiability. Participants’ actions can be verified to follow the protocols’ specifications.

11. As explained above, we will consider two discount schemes: (i) absolute discount where , • and (ii) weighted discount where

12. Remark that in the absolute discount case, some buyers may compute a negative value as their final price. This is not inconsistent with the specifications of price discrimination with absolute discount (i.e. in this case these buyers may end up getting some credit for participating in the procedure). Meeting the security specifications will rely on assuming the semantic security of Paillier scheme, and on the assumptions (and idealized model, if used) needed for the proofs of knowledge (as explained above).

13. Future • The result is likely to be that price discrimination will grow, but in a concealed form. Stress will be on tactics such as bundling and loyalty programs, which tend to disguise the actual price that is charged. This means that auction mechanisms and micropayments are likely to be used in very limited situations. On the other hand, there will be continued pressure to erode privacy in order to find out just what the willingness to pay is, as well as to control how products and services are used. Thus privacy will continue to erode.